Here’s what’s hot – and what’s not – in fintech right now

Financial technology is the hottest investment area for venture capitalists – $ 1 out of every $ 5 in funding flowed into fintech startups in 2021.

But with a recession possibly around the corner, investors are writing fewer – and smaller – checks. And they become much more selective when it comes to what kind of companies they want to support.

According to CB Insights, global venture capital investments in fintech companies fell 18% in the first quarter of 2022.

This has led to something of a rotation out of certain pockets of fintech hyped by venture capitalists last year, such as crypto and “buy now, pay later,” and into less sexy areas focused on generating stable revenue streams, such as the digitization of payment processing for businesses.

So what’s hot in fintech right now? And what is not? I went to the Money 20/20 Europe event in Amsterdam in June to talk to some of the region’s best start-up investors, entrepreneurs and analysts. Here’s what they had to say.

Investors are still obsessed with the idea of ​​making and accepting payments less burdensome for businesses and consumers. Stripe may face a few questions regarding the eye-catching $ 95 billion valuation. But that has not stopped VCs from looking for the next winners in the digital payment area.

“I think we’ll see a next generation of fintechs emerge,” said Ricardo Schafer, partner at German venture capital firm Target Global. “It’s much easier to build things.”

Niche industry words such as “open bank”, “bank-as-a-service” and “embedded finance” are now in vogue, with a number of new fintech companies hoping to eat away at the volumes of established players.

Open banking makes it easier for companies that are not licensed lenders to develop financial services by connecting directly to people’s bank accounts. Something that has caught the attention of investors is the use of this technology to simplify payments. It’s a particularly hot spot right now, with several start-ups hoping to disrupt credit cards that require large fees from sellers.

Companies such as Visa, Mastercard and even Apple are closely following the trend. Visa bought Swedish Tink for more than $ 2 billion, while Apple bought Credit Kudos, a company that relies on consumer bank information to help take out loans, to drive the expansion into “buy now, pay later” loans.

“Open banking in general has gone from a big buzz word to being seamlessly integrated into processes that no one really cares about anymore, such as bill payments or refills,” said Daniel Kjellen, CEO of Tink.

Kjellen said that Tink is now so popular in the domestic market in Sweden that it is used by about 60% of the adult population every month. “This is a serious number,” he says.

Embedded finance is about integrating financial service products into companies that have nothing to do with finance. Imagine Disney offering its own bank accounts that you can use online or at theme parks. But all the work that goes into making it happen will be handled by third-party companies whose names you may never want to meet.

Banking-as-a-service is part of this trend. It allows companies outside the traditional financial world to piggyback on a regulated institution to offer their own payment cards, loans and digital wallets.

“You can either start building the technology yourself and start applying for licenses yourself, which will take years and probably tens of millions in funding, or you can find a partner,” said Iana Dimitrova, CEO of OpenPayd.

Do you have an idea for a new crypto exchange you just want to pitch? Or do you think you might be on the next Klarna? You may have a tougher time raising money.

“The tokenization and the coin side of things we want to stay away from right now,” said Farhan Lalji, CEO of fintech-focused venture fund Anthemis Group.

The infrastructure that supports crypto – whether it is software that analyzes data on the blockchain or keeps digital assets safe from hacks – is a trend he believes will withstand the test of time.

“Infrastructure does not depend on a particular currency going up or down,” he said.

Investors see more potential in companies that make it easier for people to access digital assets without all the knowledge of someone who trades cryptocurrencies and non-fungible tokens every day – part of a broader trend called “Web3”.

When it comes to crypto, “the areas that interest us most today are areas that we have analogous experience in in classical industries,” said Rana Yared, a partner at venture capital firm Balderton.

When it comes to BNPL, there has been something of a shift in the business models VCs gravitate towards. While those like Klarna and Affirm have seen their value declines plummet, BNPL startups that focus on settling transactions between companies are getting a lot of attention.

“Growth in B2C [business-to-consumer] BNPL is declining … and regulatory concerns could limit growth, “said Philip Benton, fintech analyst at market research firm Omdia.

Business-to-business BNPL, on the other hand, “starts from a very low base” and therefore has “enormous” potential, he added.